Beyond typical commercial property insurance policy coverage for damages due to physical loss or damage and business interruption losses, there are other protections that can greatly assist business owners throughout many industries. As seasons change and weather patterns intensify – whether from the change from hurricane season to winter storms or other seasonal atmospheric conditions, these additional insurance coverage provisions can address additional expenses a policyholder may incur in restoring and protecting their property. Likewise, policyholders can tap into other coverages that protect their assets and operations from weather-related losses including utility service interruptions, amongst other concerns. When weather events prompt businesses to lean on their commercial policies, the utmost care and diligence are required to navigate a successful decision and recovery in the business’ favor. The following is a short summary of some of these additional coverages provided under property insurance policies and some coverage issues that can arise.
Extra Expense Coverage
Although policy terms vary on this issue, extra expense coverage is intended to provide a policyholder, at a minimum, coverage for expenses used to avoid or minimize additional property damage or business interruption losses and to keep the business running after a loss; e.g., by relocating a production line from a damaged location to an undamaged location. The policyholder would need to demonstrate these expenses would not have been incurred “but for” the event. Extra expense provisions can cover the policyholder for a number of unusual costs incurred simply because the catastrophe occurred; e.g., hiring security to protect damaged premises.
An issue that has arisen in extra expense coverage is whether a policyholder can claim costs for getting back into business more quickly – e.g., by purchasing replacement equipment – under extra expense coverage if they have already exceeded their limits for property damage coverage. The answer should be yes – property policies typically contain multiple, overlapping coverages, and the policyholder should be free to order its claim to maximize recovery. Further, the primary reason for extra expense coverage is to minimize the policyholder’s loss of business income (and the carrier’s obligation to pay that loss).
Expediting Expense Coverage
Similar to extra expense coverage, expediting expense coverage is meant to cover costs incurred to speed up the permanent repair or replacement of covered property or equipment. Examples of these costs include paying for overnight shipping of repair materials versus regular shipment or paying for overtime for repair crews.
Expense to Reduce Loss
Another provision available to many policyholders covers expenses the policyholder incurs that can directly be shown to have saved a corresponding business interruption amount. While the industry professionals may say “spend a dollar to save a dollar,” the prudent policyholder is working together with the insurance adjuster to document the intended expense and showing how it actually saves or reduces a business interruption loss. There are subtle but important distinctions between and among extra expense, expediting expense, and expense to reduce loss, and a careful review of the policy is required before submitting any claim under these provisions.
Contingent Business Interruption Insurance/Contingent Extra Expense Insurance
Contingent business interruption coverage is designed to cover a policyholder for loss of income caused by damage to or destruction of property owned by others, for example, suppliers and customers. An example would be coverage purchased by a helicopter manufacturer to protect it if its sole supplier of a key component suffers damage to its factory, and the helicopter manufacturer suffers a business income loss from its inability to complete the manufacture of its aircraft.
Contingent extra expense coverage is designed to pay for increased costs incurred after the disaster to minimize or avoid a contingent business income loss. Accordingly, if a business incurred additional expenses to avoid or minimize a contingent business income loss, it may have coverage for those costs under contingent extra expense coverage.
One primary issue under both of these coverages is whether the “dependent” business is one that triggers coverage. These provisions vary widely from policy to policy. Some provisions may limit coverage to “direct” customers or suppliers. Other policies may have provisions covering customers or suppliers “of any tier” (e.g., customers of customers). If a business depends upon another entity for a critical component, part, service, etc., it is wise to have an insurance professional specifically review the proposed policy prior to a disaster. Businesses can be devastated to learn after a catastrophic weather event that their contingent business interruption coverage is limited or does not provide the protection needed.
Sometimes the insurance company argues that the period of restoration ends if the policyholder secures an alternative supplier or customer, even though part of the loss continues. Policyholders should push back on this argument because contingent business income should also be governed by a period of restoration, and as discussed above, coverage should continue for the time needed by the contingent business to rebuild or replace its damaged property.
Utility Service Interruption Insurance
Utility service interruption coverage is designed to provide coverage for property damage or business income losses attributable to a lack of utility or telecommunications service. This can include coverage for damages arising from food spoiling because of a lack of power as well as business income losses due to the outage. Losses due to service interruptions may be particularly prevalent as a result of snowstorms that can cause widespread power and communication outages. Texas experienced such a storm (named “Uri”) in February 2021 that caused significant damage across the state.
Service interruption coverage provisions are typically purchased through an endorsement and can vary widely, especially in relation to the damaged property which will trigger coverage.
Insurance companies often argue the damaged service property is either not within coverage or that the policyholder cannot show property damage to the service property which caused its interruption. Along the lines discussed above, however, a service property which is not capable of performing its intended purpose is, by definition, damaged.
Flood Sublimits and Exclusions
Because flooding can result after a heavy snowfall, businesses must take extra precautions in assessing their coverage. Property insurance policies often exclude coverage for floods. Policyholders should, however, look to see how their insurance policies define the term “flood” to counter any overbroad interpretation by the insurance company. Businesses should be cautioned that should flooding occur, insurance companies will inevitably try to attribute as much damage as possible to being caused by flooding instead of the snowstorm in order to minimize any amount of payments they must make toward claims. Businesses should seek input from a professional who is qualified to assist them in making that assessment.
